Xilinx v. Flextronics: Insight to a Gray Market

In December of 2013, Xilinx filed a lawsuit against Singapore-based electronics contract manufacturer Flextronics for fraudulently selling Xilinx semiconductor chips to customers at unauthorized prices. Xilinx claims Flextronics purchased these parts at discounted rates by ordering on behalf of Flextronics customer Airvana Network Solutions. Flextronics then sold the same parts to Checkpoint Systems at $4.50 more than what Flextronics had paid Xilinx. Xilinx further claims that Flextronics relabeled parts bought from Xilinx as higher-performance components.

Additionally, the suit charges that Flextronics has dealt in “gray markets and counterfeit,” misrepresenting Xilinx’s devices by purchasing from unauthorized dealers and reselling them to Xilinx customers, as well as making unauthorized sales to “unknown purchasers in Asia” without export licenses, which Xilinx claims not only violates US export laws, but could possibly lead to a threat in national security.

The assertions made in a lawsuit are not conclusive, and both Xilinx and Flextronics are highly regarded Silicon Valley corporations. We have no thoughts whatsoever on the relative merits of the claims. However, the suit does open a discourse surrounding the sale of unauthorized components and the need for increased vigilance in quality control to trace the steps of a component’s travels.

It's important to remember that unauthorized distribution plays an important role in the electronic component ecosystem. Unauthorized distributors are the main outlet for excess components, which in the end helps component users controls costs. Unauthorized distrbutors are the channel of last resort for obsolete components, often supporting end-of-life products for many many years.

As long as OEMs and EMS providers make unauthorized sales of excess stock at discounted prices, the allure of gray market sales will always be a potential hazard in the supply chain. Most buyers know the risks when working with unauthorized distribution: prior usage, prior storage, prior handling, and counterfeiting including remarking. Experts agree the number one way to avoid counterfeit components is to procure only from authorized distributors.

Laws in the past years enacted by the current administration attempt to control procurement of components, specifically for DOD contractors, with strict guidelines to purchase from trusted and certified suppliers. A case like Xilinx v. Flextronics is just the tip of the iceberg, but an important example of the pitfalls a contract manufacturer must avoid in a market with so many dark corners.

Flextronics has yet to comment on the suit. A spokesperson made a statement saying it is "committed to complying with all the laws and regulations in every jurisdiction where we operate, [and] deeply committed to operating with the highest standards of ethics and integrity."